PLR 1314029: IRS treats customer-funded petroleum transport improvements as qualifying income

Plain-English summary

A publicly traded partnership earned income from terminalling, storing, and transporting crude oil, refined petroleum products, and liquefied petroleum gas. Customers sometimes funded or transferred ownership of pipeline interconnects, dock expansions, tankage, and related improvements that the partnership would own and use for those services. The IRS ruled that amounts received from customers, and the receipt of those improvements, constituted qualifying income under IRC § 7704(d)(1)(E) because the improvements were integral to transportation services. The ruling did not decide whether the partnership met the 90 percent gross-income test or whether it otherwise qualified as a publicly traded partnership.

Ruling snapshot

• Question: Is customer-funded or customer-provided infrastructure for petroleum transportation qualifying income?
• Outcome: Approved, based on the submitted facts and representations.
• Key authorities: IRC §§ 7704(b), (c), and (d)(1)(E).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201314029 Third Party Communication: None
Release Date: 4/5/2013 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
--------------------------------- ----------------------------, ID No. --------------
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-------------------------------- Telephone Number:
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Refer Reply To:
CC:PSI:B01
PLR-140904-12
Date:
November 28, 2012

LEGEND

X = ---------------------------------

State = -------------

Dear ----------------:

   This letter responds to a letter dated September 20, 2012, and subsequent

correspondence, submitted on behalf of X by X’s authorized representative, requesting
a ruling under § 7704(d)(1)(E) of the Internal Revenue Code.

FACTS

  You have represented that the facts are as follows. X is a limited partnership

organized under the laws of State and is classified as a partnership for federal tax
purposes. Further, X represents that it is a “publicly traded partnership” within the
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meaning of § 7704(b).

     X earns income by terminalling, storing, and transporting crude oil, refined

petroleum products, and liquefied petroleum gas (LPG) on behalf of its customers, who
include refineries, chemical and petrochemical companies, common carriers and other
pipeline transporters. X’s terminalling, storage, and transportation assets include
storage tanks, marine docks, and pipelines. X represents that X’s terminalling, storage
and transportation services are integral to the transportation of the crude oil, refined
petroleum products, and LPG at their terminals. X’s facilities serve as hubs connecting
multiple modes of transportation (such as pipelines, trucks, barges, tankers, and
railcars) involved in transporting crude oil, refined petroleum products, and LPG from
producing regions to refineries and the resulting refined products from the refineries to
their ultimate markets. Storage capacity is required at such interconnection hubs to
facilitate efficient transportation and accommodate supply and demand imbalances
within the production, transportation, and refining systems. For example, storage tanks
are necessary to accept the high volumes and flow rates of products entering X’s
facilities via marine vessels and/or pipelines, and hold the products until they can be fed
into other modes of transportation in volumes and flow rates appropriate for such modes
of transportation and the customer's demands.

    If no transportation pipeline exists between X’s current terminalling, storage, and

transportation assets and a potential customer's facilities (the location from which the
customer needs access to X’s terminals) or it is otherwise necessary to expand X’s
terminalling, storage, or transportation assets to facilitate a customer's terminalling,
storage, and transportation requests, X and the customer may enter into a separate
contract under which terminalling, storage, and transportation facility improvements will
be constructed (an “expansion agreement”). The terminalling, storage, and
transportation facility improvements may include pipeline interconnects, dock
expansions, or the construction of additional tankage and related manifolds and piping
to facilitate additional volumes of crude oil, refined petroleum products, and LPG. The
expansion agreements take several forms, but all provide that the customer will
ultimately bear some or all of the construction costs. In some cases, the customer is
responsible for constructing the facility improvements and subsequently transfers
ownership of the completed improvements to X. In other cases, the customer will
provide X with reimbursement payments to cover X’s construction costs. In still other
cases, the customer will neither construct the improvements nor explicitly pay X for the
construction of the improvements, but will instead agree to pay a premium for X’s
terminalling, storage, and transportation services; through payment of these premiums,
the customer will eventually reimburse X for some or all of its construction costs. In all
cases, X will ultimately own the terminalling, storage, and transportation facility
improvements constructed pursuant to the expansion agreements.

  X represents that the expansion agreements are integral to X’s terminalling,

storage, and transportation of crude oil, refined petroleum products, and LPG.
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Specifically, X represents that each terminalling, storage, and transportation facility
improvement constructed pursuant to an expansion agreement is necessary to facilitate
a service relationship, and that each customer bears the costs of the terminalling,
storage, and transportation facility improvement in order to induce X to provide it with
terminalling, storage, and transportation services. X also represents that the sole
purpose of the expansion agreement is to facilitate the terminalling, storage, and/or
transportation agreement. Furthermore, X represents that it will only enter into an
expansion agreement if it is also entering into a transportation, storage, and/or
terminalling agreement with the same customer.

     X seeks a ruling that the amounts it receives from terminalling, storage, and

transportation customers for construction of terminalling, storage, and transportation
facility improvements (or receipt of such improvements from customers) under the
expansion agreements for the terminalling, storage, and transportation of crude oil,
refined petroleum products, and LPG will constitute qualifying income under
§ 7704(d)(1)(E).

LAW AND ANALYSIS

   Section 7704(a) provides that a publicly traded partnership shall be treated as a

corporation. Section 7704(b) provides that the term “publicly traded partnership” means
any partnership if (1) interests in that partnership are traded on an established securities
market, or (2) interests in that partnership are readily tradable on a secondary market
(or the substantial equivalent thereof).

   Section 7704(c)(1) provides that § 7701(a) shall not apply to any publicly traded

partnership for any taxable year if such partnership met the gross income requirements
of § 7704(c)(2) for such taxable year and each preceding taxable year beginning after
December 31, 1987, during which the partnership (or any predecessor) was in
existence.

   Section 7704(c)(2) explains that a partnership meets the gross income

requirements of § 7704(c) for any taxable year if 90 percent or more of the gross
income of such partnership for such taxable year is qualifying income.

   Section 7704(d)(1)(E) provides that the term “qualifying income” includes income

and gains derived from the exploration, development, mining or production, processing,
refining, transportation (including pipelines transporting gas, oil, or products thereof), or
the marketing of any mineral or natural resource (including fertilizer, geothermal energy
or timber).

  H.R. Rep. No. 495, 100th Cong., 1st Sess. 947 (1987), 1987-3 C.B. 193, 227, in

discussing passive-type income, states as follows:
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   Income of certain partnerships whose exclusive activities are
   transportation and marketing activities is not treated as passive-type
   income. For example, the income of a partnership whose exclusive activity
   is transporting refined petroleum products by pipeline is intended to be
   treated as passive-type income, but the income of a partnership whose
   exclusive activities are transporting refined petroleum products by truck, or
   retail marketing with respect to refined petroleum products (e.g., gas
   station operations) is not intended to be treated as passive-type income.

   The scope of passive-type income was later clarified in H.R. Rep. No. 1104,

100th Cong., 2d Sess. II-17 to II-18 (1988), 1988-3 C.B. 473, 507-508, which states as
follows:

   In the case of transportation activities with respect to oil and gas and
   products thereof, the conferees intend that, in general, income from
   transportation of oil and gas and products thereof to a bulk distribution
   center such as a terminal or a refinery (whether by pipeline, truck, barge,
   or rail) be treated as qualifying income. Income from any transportation of
   oil or gas or products thereof by pipeline is treated as qualifying income.
   Except in the case of pipeline transport, however, transportation of oil or
   gas or products thereof to a place from which it is dispensed or sold to
   retail customers is generally not intended to be treated as qualifying
   income. Solely for this purpose, a retail customer does not include a
   person who acquires the oil or gas for refining or processing, or partially
   refined or processed products thereof for further refining or processing,
   nor does a retail customer include a utility providing power to customers.
   For example, income from transporting refined petroleum products by
   truck to retail customers is not qualifying income (footnote omitted).

CONCLUSION

     Based solely on the facts submitted and representations made, we conclude that

the expansion agreements are integral to the transportation of petroleum and related
products. Therefore, the amounts X receives from terminalling, storage, and
transportation customers for construction of terminalling, storage, and transportation
facility improvements (or receipt of such terminalling, storage, and transportation facility
improvements from customers) for the terminalling, storage, and transportation of
petroleum and related products under the expansion agreements constitute qualifying
income within the meaning of § 7704(d)(1)(E).

   Except as specifically provided, no opinion is expressed or implied as to the

federal tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. In particular, no opinion is expressed as to whether X meets
the 90 percent gross income requirement of § 7704(c)(1), whether X is a publicly traded
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partnership within the meaning of § 7704(b), or whether any other type of income not
addressed in this ruling is qualifying income under § 7704(d).

    This ruling is directed only to the taxpayer requesting it. However, in the event of

a technical termination of X under § 708(b)(1)(B), the resulting partnership may continue
to rely on this ruling in determining its qualifying income under § 7704(d)(1)(E). Section
6110(k)(3) of the Code provides that it may not be used or cited as precedent.

     In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to your authorized representative.

                                   Sincerely,


                                   Joy C. Spies
                                   Joy C. Spies
                                   Senior Technician Reviewer, Branch 1
                                   Office of the Associate Chief Counsel
                                   (Passthroughs & Special Industries)

Enclosures (2)
Copy of this letter
Copy for § 6110 purposes

cc: